The distribution of benefits is an immutable problem. For start-up companies, how can founders reasonably arrange equity structure to avoid "bloody wars"? What minefields should equity design avoid? The situation of each company is different, and the solutions are also different, but the root causes of these problems are very similar. Today we will discuss several typical "minefields" of equity design..png)
Too Scattered
In this form of equity structure, equity is distributed among all shareholders, and the proportion is similar, like 20% : 30% : 10% : 10% : 30%. Such shareholding structure has no core shareholders, mutual checks and balances among shareholders make it difficult for enterprises to make decisions, and enterprises spend a lot of time in the game between shareholders. There is no one to take responsibilities. Small shareholders do not care about the development of the enterprise, instead, they hope other shareholders to spend a lot of effort to manage, then they can enjoy the benefits. But the occurrence of such infighting events will affect the development of the company, so an important principle of equity design is to reduce and simplify the conflicts between shareholders.
Too Uniform
Most of the time, it is not because the founder of the company wants to arrange it in this way. It is precisely because everyone has no way to accurately evaluate their contribution at the beginning. At this time, the situation of equity distribution may be relatively equal. Equally equity distribution commonly occurs when founders are familiar with each other, such as classmates or colleagues. At the early stage of the company, founders easy to reach a consensus, they feel that it is easy to register the company. But after that, with the continuous development of the company, bigger problems will be exposed. The most typical one is that in the process of company development, each person has different abilities and different contributions to the company, which will make some people feel unfair, thus causing internal conflicts and affecting the development of the company, the most important influence occurs in the decision-making by voting. It is easy to lead to the complexity of decision-making level. Such equity ratio causes no one to make final decision, no one take responsibility, people always hope the other parties to do things. Enterprises are left to sink or swim.
Highly Centralized
As the founder of the enterprise, he/she owns 100% of the shares of the enterprise and plays a leading role in the development of the enterprise. On the surface, this structure gives the founder absolute control and facilitates decision-making, but if you dig a little deeper, it is not different from the "one word" family management model. The board of directors and shareholders' meeting of the enterprise are all in vain, and the founder alone is responsible for the operation and management of the enterprise. This type of company has a high probability of cultivating managers with part-time mentality, which ultimately leads to the company's management and operation pressure will be concentrated on shareholders, and the stability of the core management team is poor, which is not conducive to the rapid and steady development of the company. The worst-case scenario is that if the founder makes a bad decision, the business will fail.
The minefield of equity design we discuss today actually refers to several kinds of equity structures with high equity disputes. The purpose is to hope that entrepreneurs can avoid high-risk equity structures as much as possible. It does not mean that the companies with the above equity structures will definitely have equity disputes. While an equity structure is not the answer to everything, avoiding the wrong equity design can make a startup a step closer to success.
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